The Reserve Bank of India (RBI) on Tuesday cut its key lending—the repo rate—by 25 basis points to 6.25 percent, as a newly set up panel felt that inflation levels were low enough to reduce loan rates.

A man walks past the Reserve Bank of India (RBI) head office in Mumbai, India, June 7, 2016/REUTERS

The Reserve Bank of India (RBI) on Tuesday cut its key lending—the repo rate—by 25 basis points to 6.25 percent, as a newly set up panel felt that inflation levels were low enough to reduce loan rates.

The decision of the monetary policy committee (MPC), headed by new RBI governor Urjit Patel, will likely cheer business leaders and households as cheaper loans will aid investment and spending.

The six-member Monetary Policy Committee, which voted 6-0 in favour of a cut, noted that an improvement in sowing along with supply management measures will improve the food inflation outlook.

"The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action," the policy statement said.

The committee also noted "potential cost push pressures that may emerge, including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices" but said that on balance, a rate cut was warranted.

A lower repo rate—the rate at which banks borrow from RBI--would mean households may expect cheaper bank loans to buy houses and goods such as cars, which peak during the festival shopping season in October and November.

Since January 2015, the RBI has cut the repo rate six times. India’s retail inflation has touched a five-month low of 5.05 percent in August, triggering hopes of a rate cut.

The RBI and the government have set a retail inflation target of 4 per cent for the next five years with an upper tolerance level of 6 percent and lower limit of 2 per cent.